Verizon iPhone data plan: Unlimited or pay as you go? Which will the carrier choose?

The Limits of Unlimited Data

Why Verizon's unlimited iPhone plan won't last.

When Verizon launched its version of the iPhone last week, the carrier offered one major advantage over AT&T—an unlimited data plan. Although Verizon hasn't yet disclosed the price of its iPhone plan, it generally charges customers $29.99 a month to use the Internet all they want. AT&T, meanwhile, did away with its unlimited plan last year. The carrier now offers two iPhone plans whose prices depend on how much data you consume —you can download 200 MB of stuff for $15 a month, and 2 GB for $25. (AT&T will let you keep the old $30 unlimited plan if you signed up for it before the rate change last summer.)

AT&T's decision now looks ahead of its time. The Washington Post reported late last year that every major carrier—including Verizon—is considering ditching flat-rate data plans on next-generation "4G" networks, which will allow for much faster download speeds. Over the next few years those networks will become the main way our smartphones connect to the Internet. So don't get too attached to all-you-can-consume, flat-rate mobile browsing, Verizon iPhone users. It won't be around for long.

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And say hooray, too, because unlimited data plans deserve to die. Letting everyone use the Internet as often as they like for no extra charge is unfair to all but the data-hoggiest among us—and it's not even that great for those people, either. Why is it unfair? For one thing, unlimited plans are more expensive than pay-as-you-go plans for most people. That's because a carrier has to set the price of an unlimited plan high enough to make money from the few people who use the Internet like there's no tomorrow. But most of us aren't such heavy users. AT&T says that 65 percent of its smartphone customers consume less than 200 MB of broadband per month and 98 percent use less than 2 GB. This means that if AT&T offered only a $30 unlimited iPhone plan (as it once did, and as Verizon will soon do), the 65 percent of customers who can get by with a $15 plan—to say nothing of the 98 percent who'd be fine on the $25 plan—would be overpaying.

But it's not just that unlimited plans raise prices. They also ruin service. Imagine what would happen to your town's power grid if everyone paid a flat rate for electricity: You and your neighbors would set your thermostats really high in the winter and low in the summer, you'd keep your pool heated year-round, you'd switch to plug-in electric cars, and you'd never consider replacing your ancient, energy-hogging appliances. As a result, you'd suffer frequent brownouts, you'd curse your power company, and you'd all wish for a better way. Economists call this a tragedy of the commons, and it can happen on data networks just as easily as the power grid—faced with no marginal cost, it's in everyone's interest to use as much of the service as they can. When that happens, the network goes down for everyone.

Who do we blame when that happens? The carrier, of course. But even though all cell companies are furiously improving their infrastructure, they're bound to keep suffering outages if they maintain flat-rate plans. For the same reason that building more highways doesn't reduce traffic—it just persuades more people to drive, blocking all those new lanes—building better networks won't improve service if the scourge of the unlimited plan remains. Customers would surely respond to better networks by using their phones more often, and that would clog the networks once more.

Automobile traffic engineers have lately experimented with addressing this problem via "congestion pricing"—charging people for driving when the roads are clogged. That's a relatively new innovation on the road, but the concept isn't novel: Nearly every utility we consume—electricity, natural gas, water—imposes some kind of cap or usage charge. Even home broadband service is sold in tiers: People who don't use the Internet very much pay for low-speed service, while those of us who want to spend most of our time downloading high-definition movies pay more for much faster pipes. (The only successful service that I can think of that doesn't include either caps or usage fees is Netflix's streaming movie plan. That seems to work because there's a built-in cap: You can watch only so many second-tier movies a month before you give up. But as Netflix continues to sign bigger titles and its streaming costs rise, I bet it will begin to tier its streaming plans.)

Whenever I call for carriers to ditch unlimited plans, I get an earful from readers who think I'm asking for higher prices and/or excusing companies for their terrible service. I understand these concerns. Phone companies aren't known for their transparency; we all fear that adding variability to the bill will add complexity, too, and that we'll be opening ourselves up to all kinds of hidden fees. The main worry is "bill shock"—opening your statement at the end of the month to discover that you've racked up some enormous sum, just because you had no idea you were over your limit.

If you're worried about a world without unlimited plans, consider that it's been more than six months since AT&T imposed an iPhone usage cap, and so far the service is working really well. AT&T alerts you by text and e-mail when you're nearing your monthly cap, and surpassing the cap doesn't result in onerous fees. If you go over your 200 MB plan, AT&T charges you $15 for 200 more megabytes, and if you blow by the 2 GB plan, you're charged $10 for 1 GB more. Those are reasonable rates; indeed, because the prices feel so fair, I wonder if many people even notice that their plans are limited in any way. The caps are there, but in practice, AT&T's iPhone plan feels unlimited.

It's true that these fixed plans aren't "future-proof." As networks get faster and cell phones and apps get better, we'll all use the mobile Internet a lot more often; even if 200 MB is enough for you today, it will be too small next year. But service providers change their plans all the time as usage patterns and technologies change. In particular, as we move to 4G networks, I suspect that AT&T will ditch monthly caps and instead offer a range of speed tiers—a slow plan, middle plan, and fast plan. (Verizon says it plans to offer data caps on its 4G network, but its pricing is also bound to change as those 4G phones become more popular.)

I'd welcome that change. But whether carriers limit your plan by speed or by monthly bandwidth, the important thing is that they're limiting something, because offering unlimited use for a flat rate is madness: It's expensive, it's unfair to most of us, and it ruins the network.

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